Recent Economic Crisis in Argentina: A Perspective

Since 1983, Argentina has some arrangement or other with the IMF and, except for a few years, with World Bank supported Structural Adjustment Loans (SALs).

For details of the Austral plan, see Chawla R. L. , “Stabilisation Programmes in Latin America: Austral Plan vs Cruzado Plan”, Pakistan Journal of American Studies (Islamabad), vol. 5, no. 1, March 1987, pp. 44–56. The second phase was started in February 1986.

For instance, the average rate of inflation hovered around 413.1 per cent per annum during 1983–92 with real GDP growth rate a measly 1.7 per cent per annum. IMF, World Economic Outlook, May 2001, pp. 174 and 182.

Sangmeister Hartmut , “Is Chile a Model for Latin America? A Comparative Analysis of the Economic Reforms in Argentina, Brazil and Chile”, Economics (Tubingen, Germany), vol. 58, 1998, p. 125.

Cavallo Domingo F. Mondino Guillermo , “Argentina's Miracle? From Hyperinflation to Sustained Growth”, keynote address at Annual World Bank Conference on Development Economics, 1995, pp 11–22.

Ibid., pp. 18–20.

Ibid., p. 13. Productivity increased at an annual average rate of 2.3 per cent for 1915–30; 1.7 per cent for 1930–50; and 2.8 per cent for 1960–74. Productivity growth fell drastically by a cumulative 34.3 per cent — a negative 2.8 per cent per annum during 1975–90. Capital accumulation grew by 168 percent between 1960 and 1990, output increased only 85 percent, indicating a low marginal product of capital. Labour productivity, as measured by the ratio of GDP to employment grew by 25 per cent during this period. A large share of aggregate capital accumulation during this period was the product of government fixed capital formation.

In 1994, the domestic savings ratio was 17 per cent; local businesses perception was that overvalued peso had appreciated by 20 per cent between April 1991 and November 1994 against its trade partners' currencies. Current account deficit was estimated to reach a whopping $10 billion in 1994.

The restrictions of the monetary base, following the ‘tequila effect’ led to an acute liquidity crisis in the Argentine banking sector. Heavy cash withdrawals combined with the collapse of share and bond prices resulted in 47 banks becoming insolvent in 1995 — almost one-quarter of the Argentine banking sector. See for details, Sangmeister, n. 4, p. 126.

While the poorest 20 per cent of the population earned 7.4 per cent of national income in 1991, the figure had fallen to 7.1 per cent in 1996. The top 20 per cent received 45.5 per cent of national income in 1996 compared to 43.9 per cent in 1991. Ibid., p. 128.

The Economist (London), 26 November 1994, Argentina Survey, p. 7.

IMF Survey, 21 March 1994, p. 96.

The IMF breaks up Argentina's Party, Financial Times (London), 8 April 1998.

The IMF mission also recommended a series of measures, including tax-raising measures such as on diesel, extending value added taxes to pay for cuts in taxes on labour; a freeze on new infrastructure projects; increases in bank liquidity requirements to help curb the growth of domestic bank credit and labour reforms. Ibid.

A plan was to build 10,000 km of motorways to be paid for by new fuel taxes; to raise teachers' salaries, paid for through a one per cent tax on car sales. But the IMF echoed the Argentine economy ministry view that such projects should be paid for by spending cuts elsewhere. Ibid.

However, according to geffrey D. Sach's analysis, Argentina's widening budget deficit is mainly the result of its economic collapse since 1999, not its cause. This is contrary to the position of the IMF which considers fiscal deficit as the main culprit of the economic crisis in Argentina. Economic Times (New Delhi), 3 May 2002, p. 6.

Some of the major plans included across-the-board budget cuts (mid-march); plan of selective tax concession and higher import tariffs (end-march); mega swap (late May), plan for further tax cuts and a mechanism to compensate non-energy exports and imports for the appreciation of the US dollar vis-a-vis the euro and zero-deficit plan of 11 July.

Over $50 billion of government bonds were swapped for those loans on 30 November, 2001. The government is yet to complete the second phase of the restructuring.

The Economist, March 2, 2002 p. 25; March 27, 2002, p. 42.

Around 1989–90, Argentina was close to full employment. General price rise matters but given the full employment situation, employed persons command some purchasing power unlike under an unemployment situation where there is no income at all. Ibid., p. 42.

Since December 2001, the ceiling of $1000 a month withdrawal from the banking sector has not only affected households but crippled the informal services economy due to liquidity shortages.

The IMF insisted on the repeal of two populist anti-bank laws such as transfer or compensate the losses arising out of conversion of dollar debts into peso debts; and to slash public spending. The cuts meant sacking 4,00,000 public employees in the provinces which was very difficult to reconcile with Dulhade's need to buy support in Congress.

Although there was drastic reduction in public spending, Argentina's share as a ratio of GDP no doubt rose to 30 per cent in 2000 from 27 per cent in 1995. Further, gross investment fell 25 per cent between January-March 1999 and January-March 2001. More so, between July-November 2001.

Argentina withdrew its deposit from the banking system to the tune of $ 15 billion in so short a period of time. Tax revenue as a proportion of GDP in Argentina is around 21 per cent as against 30 per cent in Brazil. See The Economist, March 2, 2002.